Let’s face it, it’s tough for small businesses to get loan approval from the banks. Small business lending took a hard hit during the 2008 recession, although many believed it would eventually find its way back again. Even so, that has not been the case, and bank loans to small businesses have declined by 20% since the recession.
Banks now require a multitude of steps and need to review extensive documentation to process a loan and still yet, have a high rejection rate. While the data shows that business growth is on an upward trend, the struggle to access working capital still exists. 28% say it’s still a challenge to access funding for their ventures and 30% have been denied a loan from their bank, according to one of our Small Business Reports.
If you’ve applied to your bank for funding only to be turned down, here are some reasons why:
Bad credit is the most common reason banks reject small business loan applications. If you’ve only been in business a year or so, chances are your score doesn’t meet what traditional banks require. The same goes if you have bad personal credit, they will not take on the risk. There are steps you can take to establish better business credit:
- Form an LLC, S-corporation, or C-corporation (if you haven’t already)
- Apply with the IRS for an EIN number
- Make sure at least some of your suppliers report your transactions to business credit bureaus
- Pay your bills on time
Although banks are often the first stop for small business owners looking for a loan, they usually aren’t the easiest. Banks have specific and stringent guidelines and requirements. If you don’t fit into their box, chances are slim you will qualify to borrow money. You must provide the banks with financial details of your business as well as personal information from all owners. This includes all current and past loans and debts incurred, all bank accounts, investment accounts and credit card accounts. Banks require a lot of documentation making the entire application/approval process weeks to complete. Most small business owners cannot afford to wait that long and need funds right away.
No collateral: When deciding to offer your company a loan or not, the banks will want something in return in the case you can’t reimburse them. The bank will seize that collateral to recoup any losses. When small businesses are just starting out they most likely don’t have a lot to offer the banks in the form of collateral. To secure a loan, you need to offer them value and if you can’t, they will reject you. In an emergency, providing that collateral can prove to be a challenge, or you may not have proper documentation required to prove you are indeed the owner of the asset.
Weak cash flow: Lack of cash flow is the reason why many small businesses fail. Banks need to see the documentation that the business is making sufficient recurring profit each month to cover all expenses. This is hard for small businesses to show because of all the startup costs in the first few years and cyclical changes. As a result, small businesses are chronically underbanked.
Traditional banks will want to check to see what your long-term success looks like. They will gauge if your business offers something that will still be in high demand if the sector becomes saturated or if economic factors may likely increase your costs of doing business. For example, if your focus is on international transactions, shipping is a huge part of that. If gas prices continue to rise, your business costs will increase and may give them a reason to reject your loan. Unfortunately, this is something you don’t have control over but you track competitors and anticipate the economic factors which may put a hardship on your financial status.
Access to capital continues to present a challenge to small business owners, but there are options available for business loans, especially alternative lenders. Alternative lenders are usually more flexible than banks when it comes to approvals and repayment schedules. The application process is simple and you can receive funds as fast as the next day. They focus on the health of the business and not personal credit history.
At Reliant we strive to create partnerships with small business owners so they know they have a renewable source for capital and the repayment methodology works for them. We prioritize quality service and client relationships, so they come back to us each time they have a need for funding. If you’ve been turned down by your bank, we can help.